FG may borrow N2tn to finance 2015 budget — Chioke

The Managing Director, Afrinvest West Africa Limited, a research and investment advisory firm, Mr. Ike Chioke, tellsOYETUNJI ABIOYE how falling oil prices will pose challenges to the Nigerian economy this year

How would you analyse the proposed budget for this year?

The government has given us a draft of this year’s budget; it has yet to be passed into law. I am waiting to see when this will happen, even though everyone is in politics mood. At some point, the National Assembly has to sit and pass it into law. But clearly, the N3.6tn proposed budget for 2015 shows only a 3.4 per cent decline in top-line revenue for the Federal Government, compared to the 2014 budget.

My biggest challenge with that number is that it seems not to reflect what is on ground, as accurately as it should. The oil benchmark for the budget has been pegged at $65 per barrel of crude oil, but the price of oil is currently below $50 per barrel. Also, the consensus opinion from many analysts today suggests that the oil price is going to trade around $40 to $50 per barrel and may become the new stabilised environment.

What then happens to Nigeria if oil price remains below $50 per barrel for most part of this year?

If you recalibrate the budget at say $45 per barrel, you will find out that we have a shortfall of N1tn in revenue. And that N1tn is a lot of drop from the oil revenue as well as the tax revenue coming from the oil sector of the economy. Without going into much too much of details, it is not a linear relationship between the drop in oil price and the nation’s revenue. For example if oil price is at $100 per barrel and you sold one million barrel, the government does not actually get $100m; the government gets something around $40m because there is cost of production. There is cost sharing between the government and the companies involved in oil production. These companies are into various joint-venture agreements and production-sharing partnerships with the government and other private companies. So what comes to the government is about $40m after the deduction of the production cost.

However, when the price drops from $100 per barrel to around $50 (bearing in mind that there is a cost of production that does not go down), the drop in government revenue is very significant; it could be as much as 70 per cent. This is because as the oil price is dropping, the cost of production is still flat. This has an impact on what the government will get from oil revenue and by implication the amount to be shared by the three tiers of government.

This is why we feel that the budget is probably not reflective of what the current environment suggests. In the same budget, you see a domestic borrowing of N570bn, which is similar to what the government planned to borrow last year, although it ended up borrowing about N1tn. Given that we estimate about N1tn funding gap in the revenue, we estimate that there may be about N2tn additional borrowing this year to make up for the shortfall; but the government won’t put it there yet.

What is your take on the sharp drop in capital expenditure in the budget?

Capital expenditure has fallen from N1.1tn last year to N633bn this year. The difficulty with the capital expenditure this year is that there are so many programmes that are outside the control of the government. An example is the elections coming up in February. If Jonathan wins, he will be sworn into office in May. That means the cabinet he currently has are probably handicapped because they won’t have time to do much between now and May because of the noise around politics. If he gets sworn into office in May, he needs two to three months to get his new cabinet together; by that time, we are in August. That means that this year’s capital expenditure is just there in numbers. The government won’t probably spend much in that area.

What are your areas of concerns in the budget?

I’m raising an eyebrow on things like SURE-P in the budget; it means there is still an element of subsidy in the 2015 budget. Why should we be having subsidy given the current price of oil? This is probably an excellent time for the government to deregulate the downstream sector of the oil industry. At $54 per barrel of crude oil, the petrol price will fall below the N97 per litre. That is just on the PMS side; by the time we go to the prices of diesel and kerosene, you will be amazed at the difference. Amazingly, the prices of diesel and kerosene are still selling around N130 and N150 per litre, when actual cost of production going by the international standards would suggest that they should be around N70 or N80 per litre. If I was in government, I would have used the opportunity of the decline in oil price to deregulate the whole sector and let Nigerians benefit from such a fall. And I can tell you, anybody that brings such news at this time will probably win the vote of many Nigerians. On the other side, the authorities are keeping the subsidy because they are still unsure where the price of oil is heading to. May be they are saying let us not do anything too hastily and just keep the situation as it is.

The implication is that when the actual market price is below the subsidy price, why are you keeping it and borrowing money for subsidy? That is why I said we probably need to sit down and recalibrate these numbers properly and take them carefully in the context of a consensus view that is beginning to emerge that the new normal for the oil price will probably be between $40 to $50 per barrel for the near future.

And I think it won’t be unreasonable for the government to assume that kind of threshold to the budget for this transition year of 2015. This is because this year is a difficult year in terms of politics; the swearing-in of a new president and the bringing in of a new cabinet. By the time you finish all these, the year has ended.

If it is Jonathan, it is going to be challenging; if it is Buhari it will be more so because there will be a change of the whole guard. Hence, a more conservative approach to the budget such that you try to reduce costs. And that is where I worry because we don’t have enough money, and we need to reduce our expenditure drastically.

Our income is much lower than we are projecting. We don’t need to keep the bad news away from people. We need to let them know because if we continue as if the party is still on, the crisis may come suddenly. These are serious issues that we need to look at. When finish this, we can then look at what is happening in sectors like power, telecoms, oil and gas, as well as banking because what happens at the fiscal level in government trickles down to the economy.

What do you foresee about the banking sector this year?

It is going to be very challenging for the banking sector this year. You remember we have had a gradual progression of the CBN trying to reduce the fee and commission elements that the banks used to enjoy. The Commission on Turnover for example has gone from 5 per mille to 3, 2 and now 1. By 2016, it will be reduced to zero.

And the Central Bank of Nigeria has come up with a lot of measures to control the foreign exchange and the banks’ capacity to have an arbitrate position in the forex market. These are taking away the fee incomes that the banks should ordinarily have enjoyed. So, I see that some banks will probably be in a place that their cost structure may be too difficult for the income generated to carry. They will have to find new ways to generate additional income. But trying to find new ways to generate additional income in an environment where there is a declining revenue overall for the federal, state and local governments is going to be more very difficult. It is going to be a depressed year for the banks. Good ones may probably report similar numbers to what they reported in 2014, if they are lucky but the 2014 results have yet to be released; the 2014 result is probably going to be weaker than 2013. So, it will be a hard time. If the banks are having difficulty, you would expect that the rest of the economy would do.

What are your strategic plans for 2015 as an organsation?

2015 is actually a special year for Afrinvest. The original firm from which Afrinvest was founded was called Securities Transactions and Trust Company Limited, which was founded by my Chairman, Godwin Obaseki, in 1995. So in 2015, we will be celebrating our 20th anniversary. It is a very special year for us. It is also a year we feel we are consolidating the transformation of the firm, given the challenges we faced following the 2008/2009 global financial crisis. At that time, the firm was a single legal entity that was an issuing house, a broker-dealer and a portfolio manager. Today, we have re-organised the firm as three different companies with Afrinvest West Africa as the parent company; an issuing house, Afrinvest Asset Management – a portfolio manager which has three funds listed on the NSE; and Afrinvest Securities – a broker dealer which is a dealing member of the NSE. Last year, Afrinvest launched an online trading platform called Afrinvestor.com which enables all our clients to trade online directly at real time using any Internet-enabled device. We are very excited about 2015 and we seek to further extend our franchise. We have met all the minimum capitalisation requirements and we will be looking to support more of our colleagues in this industry. So, we will be looking for acquisitions and mergers in the asset management space, brokerage space and other areas related to our business. We will be looking to celebrate our achievements this year.

What are some of your achievements last year?

There are some of our deals that we can’t mention because of confidentiality reasons. But there are some others we are able to disclose because they have to do with the public. Last year, we advised AMCON on the sale of Mainstreet Bank and it was a big transaction that was closed within six months, with AMCON realising N126bn from the sale of its 100 per cent share in the bank. It was bought by Skye Bank Plc, which had emerged as the preferred bidder from the transaction.